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Binary Options Trading Guide
Welcome To Our New Traders “Dummies Guide” On The Basics Of Binary Options
Hi and welcome to the BinaryTrading.org’s New Binary Option Traders Guide. This page covers the basic but important facts about binary options you need to know before you begin trading. It is a good idea to bookmark this page as you will likely reference it in the future. Here is an outline of the things you will learn.
- What is a Binary Option?
- Types of Binary Option Trades Available
- Basic Strategies
- Tools You May Want
- List of “Things To Know”
- Example Trades
- Getting Started
What Are Binary Options Themselves
Binary options are very simple option contract with a fixed risk and fixed reward. These options are called binary options because there is a “one or the other choice” and a one or the other payout after the option expires. One or the other choices include up or down, or touch and no/touch. In computer code binary means 1 or 0, or one or the other.
The way a binary option works is from the traders perspective (yours) is that you choose whether or not a certain underlying asset (a stock, commodity, currency etc) is going to go up or down in a certain amount of time. You essentially bet money on this prediction. You are shown how much money up front you will earn if your prediction is correct. If your prediction is wrong, you lose your bet and the money risked. If you predict correctly you get your money risked back PLUS a return. These returns usually are between 70-85%.
A brief example would be that you predict the price of gold to rise from it’s current price of “$1612.75” one hour from now. The winning trade offers a return of 80%. You place a $100 trade on this idea.
One hour from now the option contract expires (closes) and the contract is graded as a “win” or a “loss”, or “in the money” / “out of the money”. Gold goes up to $1613, you predicted correctly. You get your $100 back and a return of 80% – or $80 for a total of $180. Even though gold only went up a tiny amount, you still earn the 80% return. Magnitude of price movement is not a factor in the amount of your return.
Key Ingredients Of A Binary Option Trade
All of the different binary option contracts have these three key ingredients that traders need to take note of. They are the expiry time, the strike price, and the payout offers.
- Expiry Time
- Strike Price
- Payout Offer
The expiry time is simply the length of time from the moment you ‘buy’ the option contract until it closes. This can be as fast as 60 seconds or as long as a month. The majority of traders are trading the short term binary options, anywhere from 60 seconds to 30 minutes.
The strike price is the price that you were able to enter the trade at and this is the price that determines whether or not your trade is a winner or a loser. In the brief example above, the strike price is $1612.75. This is the price that gold needed to close at above in order to win this trade.
The payout offer is the return that binary option broker is offering to you. In the gold trade example above, the payout offer was 80% for a win and 0% for a loss. Some trades do have a return percentage for losses, typically up to 10% although this is broker and trade dependent. The payout offer is known up front before risking any money.
Types Of Binary Options Available
There are multiple types of binary options available to trade. The simplest and by far most common trade is the Up/Down trade. You can learn about the different types of binary options available to trade here.
We have compiled a list of basic binary option strategies that will help you get started making higher probability trades.
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Tools You May Want To Use
I am going to beef up this section as new tools arrive on the market to help you make your trades. For now you can review some of the binary trading signal services on this page.
Key Things To Know About Binary Trading
So now you understand the basics of trading binary options. Some key things you should remember before you dive in are these:
- Your risk is limited to your trade amount
- The minimum trade is as little as $10
- You do pay for losing trades – you lose your trade amount (or the majority of it)
- There is plenty of risk involved. Never ever invest more with a broker than you can afford to lose. It’s risky!
- You never take any ownership of the underlying asset – you only “bet” on the direction of it’s price movement
- To make money over the long term you have to win the majority of your trades
- Up / Down are only 1 type of binary option, there are many different kinds of trades available to make with binaries
- Trading binary options is designed to be easy to do.
Your risk is limited to the amount you place on the trade. Your payoff is clearly stated before making the trade. If you win a binary options trade you win a fixed amount of cash. Since there are only two possibilities, that’s the origin of the name “binary options.”
Screenshot of a Binary Trading Interface – Choose Up Or Down, How Much To Risk and “Apply”.
- Up or Down aka ‘Call or Put’
Do you think the price of “x” is going up or down? In the screenshot above from Banc De Binary, we are looking at the current price of gold. Gold is “x”. The green line is the price movement of the gold over the course of time. The red section on the right hand side is the last moment you can trade this binary option. After that point, the option is closed for trading. It has not expired quite yet if you traded previously, however your window of trading is over.
If you think the price of “Gold” is going up you place a “call”.
If you think the price of “Gold” is going down, you place a “put”.
Those are your only two options. Hence “Binary”. If you pick the right choice of the two you win the trade. If you pick wrong you lose the trade. There are two choices only. ‘Up or Down’. And two outcomes, ‘Win or Lose’.
That is the very basics of binary trading for dummies. It is that simple, and it is designed to be that easy. Your return is clearly stated before hitting the ‘apply’ button. You will earn 72% on your investment if you finish the trade ‘in the money’.
“X” can be any number of underlying assets. It can be a certain stock or it can be the price of gold or oil. It can be a currency pair or it can be the price of facebooks stock. You get to choose what underlying asset you want to trade.
There is one more important factor left out of the simple illustration above and that is the expiration time or maturity date of the option. This is the point in time when the trade expires. This is the point when the actual price of the underlying asset is determined and you find out if you finish the trade ‘in the money’ with a win, or ‘out of the money’ with a loss.
If you chose ‘up, or call’ and at the the price expired higher, you win. The expiration times vary from as fast as 60 seconds to as long as hours, days and even weeks.
Binary Options Trading in the UK
Everything you need to trade binary options successfully.
Research. Find a broker. Trade.
For UK investors, trading with binary options is a tax free form of investment with very quick results – minutes rather than months or years. The word binary is used because there are just two possible outcomes – either the trade is successful, and the investor gains a significant return (usually between 75% to 95%) – or the trade is unsuccessful, and the full investment amount is lost.
During 2020 however, European regulators have prohibited the sale or promotion of binary and digital options to retail investors in the EEA. This includes the UK. Only professional clients or professional accounts are now permitted to trade binaries with regulated firms. A professional trader must meet 2 of these 3 criteria:
- Open at least 10 trades of ‘significant size’ per quarter (brokers define ‘significant’ differently)
- Own a portfolio or trading capital of €500k or more
- Have worked for 2 years in the financial industry, or have experience with complex trading instruments.
Unregulated firms may not adhere to the new ESMA rules, and will continue to accept UK traders. This does increase risk for the trader, and makes finding a trustworthy broker even more important. It is however, possible to find brokers regulated outside of the EU that will accept EU traders, and are still regulated by respected bodies.
So ‘binaries’ (or ‘digital options’) are a high risk form of investment, but that risk is offset by the potential for very high rewards with minimal waiting time. Most brokers are regulated, offering consumers the sort of protection they would expect while using financial instruments of this type. Returns from binary trading are also currently viewed as tax free by HMRC.
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What Are Binary Options?
Binary option meaning – Binary options are a derivative, traded on any asset or market. For example a stock price (Twitter, AstraZeneca etc), indices (FTSE, DAX, Nikkei), commodity value (gold, crude oil) or foreign exchange rate (EUR/USD, GBP/USD). Even cryptocurrencies such as Bitcoin or Ethereum can be traded.
The main difference between more traditional stockbroker trades, and binaries, is the clear identification of risk and reward before the trade is made. An investor knows exactly how much is at risk, and crucially, also knows the exact value of any potential returns. No calculator, formula, or maths degree is needed to work out profit and loss on a binary option.
This structure of the trades is what has led to the terminology of “all or nothing” , or “cash or nothing” being widely used.
The only decision for a trader is if the value of the underlying asset will rise or fall. The degree of the price change is not important. The trader is purely speculating on whether the price will be higher or lower than the current price, at a specific time in the future.
Short term price movement can be triggered by news stories or headlines, quarterly statistics, buyout rumours or even global security fears.
Trading binary options offers a Yes/No proposition. Although there are variations on the High/Low option, this type of investment will always have a black and white, Yes/No, binary outcome. Where trades can be closed, redeemed or sold mid-trade, payouts have absolute figures of 0 and 100 and prices move between as the market dictates – until closure.
Every binary option is offered with an expiry time. This is the point at which the trade will end. So the price at expiry is the one that will decide whether an option has won or lost (“in the money”, or “out of the money” in binary jargon). These expiry times can vary from just 30 seconds or 1 minute, (known as ‘turbos’), to a full day (‘end of day’), to even longer in some circumstances – rolling up to a full year.
Generally however, a binary option is used for short term trading – usually under 30 minutes (5 minutes are the most popular). Longer term expiries – and the element of fixed risk – does make them useful tools for hedging or diversifying other holdings.
Payouts change dependant on the asset and the expiry time. Differences can be significant so traders looking to use binary options long term, need to shop around to find the best payout for the asset class (or classes) they intend to trade.
Video Tutorial – Binary Trading Explained
Watch this video tutorial of the IQ Options platform, which shows how to place a binary trade:
Although binary trading is in a period of growth, it remains a relatively unknown product. Over time, this is likely to change. As digital options (as they are also known) offer a very simple fiscal arrangement. They are a legitimate way to play the financial markets.
Binaries offer a clear trading choice, but they are also high risk / high reward. There is however, no leveraged exposure with a binary trade, so the risk and reward ratio is also simple to manage.
Are Binary Options Safe?
Binary options suffer from a poor reputation. This is basically a result of dishonest and irresponsible marketing and cyber crime, more than an issue with the product itself. With tighter regulation, and a better understanding by the wider public, these options can – and will – move into the financial mainstream. Which was where they originally developed.
While FCA regulated agents and businesses may still have their flaws and faults, they are not fraudsters. The angry emails we receive focus entirely on unregulated brokers promising “easy money”, or a route to “get rich quick”. Read our section on avoiding scam brokers below.
Advantages Of Binary Trading
Many of the advantages of using binaries are related or linked. Here we list some of the benefits to using this form of investment – not just for the retail investor, but also to the market makers or brokers:
Managing risk when trading binary options is clear cut. The amount of the trade is the full amount that is at risk. This clarifies the risk not only for the trader, but for the broker too. Their pricing model reflects the accurate knowledge of their liability.
Trading Fees And Spreads
The certainty of risk provides a solid foundation for brokers to work within and manage. This leads to low trading feed, tighter spreads and higher payouts. To protect themselves further, they may use a liquidity provider or hedge their own positions. The expensive broker costs of clearing houses becomes unnecessary.
Leverage, or gearing, is not generally available with binary trading. This benefits the broker again, as it means all trades must be funded in full. In other words, no trader can default on a trade. With leverage, if things go wrong, there is a real risk of the broker not being paid. This is a big difference vs spot forex or spread betting.
Layers of complexity can be added to the standard fixed payout option. From a ladder option, to boundary trades or more advanced ‘nesting’ of options to create ‘strangles’ etc – binaries can be used in a huge variety of ways.
A binary trade offers the greatest level of flexibility. They even provide a mechanism to speculate on a market remaining flat, arbitrage, or to take a view on the trade volume of the underlying asset.
Robots and Auto Trading
Auto trading robots (‘bots’) often rely on signals and algorithms triggered by price graphs. Again, these robots attract many of the undesirable operators, and the automatic nature of the trades increasing risk further. New traders should be especially careful. A large amount of ‘due diligence’ is required when trying to find the right robot service.
An alternative approach is for traders to build their own robots using their own entry points. A growing number of brokers now offer traders the ability to put their own trading robot or program together, using simple tools. These hacks allow combinations of technical analysis settings, such as moving averages, Bollinger bands or RSI / MFI patterns, that then open trades when those criteria are met. It has made binary options ‘pro’ robots available to everyone.
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Binary trading itself is legitimate, and not a scam. There are however, brokers and signal providers that are untrustworthy and operate scams or frauds.
It is important not to write off the concept of binary trading, purely based on dishonest brokers. These fraudsters continue to drag down the image of this form of trading. Regulators, and rule makers are slowly starting to get to grips with these operations and the industry is being cleaned up. If you want to complain about an operator to our watchdog, please let us know via our Contact Us page.
Avoid scams with these simple checks
- “Make money online” or “Get rich quick” marketing. This is a huge red flag. Binary options are a high risk / high reward investment vehicle – they are not a get rich quick scheme and should not be sold as such. A “no loss” system does not exist. Operators making such claims are being dishonest. A binary options millionaire is almost certainly fake. The Brit Method is one high profile example – swerve it.
- Cold Calls. Reputable brokers will rarely make cold calls – they do not need to. Cold calls are from untrustworthy brokers. This could include email contact.
- Bonus Terms and Conditions. If taking a bonus, read the terms and conditions. Some terms include tying in any initial deposit or capital until turnover requirements are met. The deposit is still the trader’s money – honest brokers will not lay claim to it before any trading has been done. The better brokers will also offer the option of cancelling a bonus if it does not suit the trader. CySec, the leading regulator, has recently banned the use of deposit match bonuses as they believe it leads to clients ‘over-trading’.
- Account Managers. Be very wary of any account manager, tipster or ‘guru’ wishing to trade on behalf of clients. There is an obvious conflict of interest – they have jobs with the broker. These managed accounts generally encourage traders to trade with figures way beyond their means. This “upselling” is very harmful. The intensely risky Martingale system is a frequent tactic, and results in many quickly blown balances.
- Celebrity Endorsement. Sporting legends or team sponsorship is usually fine – and verifiable. Where this backing should worry rookie investors, is where the name of a mega rich billionaire or credible source is ‘pushed’ as a selling point. Warren Buffet, Richard Branson and Martin Lewis have all been presented as backing certain propositions when they actually have zero involvement – other than to sue the perpetrators for damages via a lawsuit.
- A trader must know their broker. Seems obvious – but some operators ‘funnel’ clients to a brokers of their choosing, not yours. If the merchant demands new clients sign up with a particular broker, or they pick the broker from a limited list – do not proceed. A trader should know the broker they are going to trade with!
Being aware of the above methods should help those new to binary trading to avoid the less responsible brands. Improved regulation and more awareness should hopefully reduce these types of complaints. This in turn can allow binaries to move forward.
Already fallen victim? The services of MyChargeBack.com might be of help.
The recent ban of binaries in the EU is ill-thought out, and could well end up pushing more traders towards scams.
Our strategy pages covers over 20 known systems, drawn from a range of forum and club chats, plus expert tips and advice. From high risk Martingale, to intricate systems like the Rainbow. We also cover more specialist subjects, like forex , technical analysis, the best price action indicators, trading signals and winning strategy. All this is aimed to help you gain an edge, and win.
Signals are an alert, sent to traders. They are designed as a trading tool, helping traders to spot opportunities. They can be communicated via a range of methods – email, SMS or from a live signal website or group. Much of the irresponsible marketing associated with binary scams is linked to signals – or auto trading robots utilising them. There are some very good providers out there too. However, in general, learning how to trade binaries is a safer route than using signals to compensate for a lack of trading knowledge.
Do signals work?
Sometimes, but rarely in isolation. Some providers deliver a combination of education alongside signals and that represents a good mix. Traders must be able to fully assess a signal before they can judge the quality of them. We also highlight some of the best providers on the signals page.
Brokers And Reviews
A binary option can be used in a number of ways, and across a huge array of commodities and markets. This means finding the best dealer, best account, or best trading platform, really depends on the needs of the individual investor.
For example, some brokers may focus on forex (foreign exchange) and trading the Japanese Yen, Euro or sterling. Others may be strong on commodities and only offer a handful of FX markets. Likewise, the returns (or payouts) may differ between asset classes, and with these varying by as much as 25%, it is easy to see the importance of making the right selection.
White label platform providers such as SpotOption, Tradologic or TechFinancials also dictate what products the host site can offer, so a proprietary broker with a bespoke design might be preferable. Payment methods merit some thought – if traders want to use Skrill, Paypal, Neteller or Wire transfer, they need to check the broker delivers that.
Mobile trading apps delivered by brokers or binary agents can vary in quality too. Some specifically program for the features of specific models, like iPad or iPhone. Others ensure cross platform compatibility, catering for android, blackberry and windows tablets and devices. Some traders may have tailored demands for any hand held app, others less so.
Trade size limits may point some investors either to, or away from, certain trading accounts. Some brokers offer minimum trades of just £1, while others cater for investors willing to invest £200,000 in a single trade. So every investor needs to consider their own trading style before deciding to open an account. Even working out the ‘cheapest’ broker is not as easy as it sounds.
How To Compare The Best Trading Platforms
Our comparison table delivers a quick summary of the key points when comparing brokers. Our detailed reviews then allow potential new users to assess some of the finer points that might confirm their decision. Here is a list of some of the vital comparison points for brokers;
- Over the counter or exchange traded options
- Minimum deposit (Plus deposit and withdrawal methods)
- Minimum trade / Maximum trade
- Trading platform
- News events feeds
- Asset lists (Extended lists might include ETFs, bonds and trusts)
- Charts / Charting tools (Graph types, forecasting tools)
- Expiry times available
- Regulation (FCA, CySec, CFTC etc)
- Range of options available (Boundary, Ladder, High Yield etc)
- Welcome Bonuses
- Complaints / Customer feedback
- Account Types and Benefits (VIP, Basic, Platinum)
- Plugins and Integration. (E.g. MT4 / MetaTrader4 / MetaTrader 5)
- Promo perks, Competitions, Leaderboards or Contest Prizes
Some points might be more important to certain traders than others. So finding the “best” will be an individual choice for each new client. A speculator taking a position on the monetary policy of the Bank of England or ECB might be best served by one broker, while the person looking to bet on growth in the Apple, Facebook or Vodafone share price might want another.
Most top brokers offer demo trading accounts. These allow new clients to try the services on offer. They can see if the range of markets and investment scales suit them and only proceed to a funded account when they are happy that the right trading account has been found.
Those brokers that do provide practise or virtual balances, have confidence in their trading platform. They are prepared to let new traders see it, and try it out, risk free. The review for each broker will include whether it offers a demo in the “Key Details” section.
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In finance, binary option is an option with two possible outcomes: either you lose the investment because the result is not the one you predicted, either you win a certain value based on the value of the asset you invested in. Because of only these two possible results, the option is called a binary option. The other names that you should be familiar with, when it comes about binary options, are: all-or-nothing options, digital options, Fixed Return Options (FRO).
With binary options, from the moment you buy your option you can be sure at least about the two possible outcomes, without any other variables.
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Within the binary options trading what you need to do is to predict the trend of the price, or the level it touches. All you need to do is determine if the price will go up (and then you place a CALL option) or down (when you place a PUT options). The expiry time of the option can be from 30 seconds or 1 minute to 1 hour, 1 week or even more, as you choose. Therefore, you don’t need to wait much. Let’s say you invest 100 USD and predict that the price will increase (call option) and the expiry time is 1 hour. If after one hour the price rises to 10.01 USD, than you make 70% profit, which means 70 USD net profit. If the price is 9.99 USD, you lose your 100 USD investment.
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